IFRS Interpretations Committee

IAS 12 Income Taxes: Impact of an internal reorganisation on deferred tax amounts related to goodwill

Agenda decision

IAS 12 Income Taxes: Impact of an internal reorganisation on deferred tax amounts related to goodwill

The issue relates to how to calculate deferred tax as a consequence of an internal reorganisation of an entity.

The submission describes a situation in which an entity (Entity H) recognised goodwill that had resulted from the acquisition of a group of assets (Business C) that meets the definition of a business in IFRS 3 Business Combinations. Entity H subsequently recorded a deferred tax liability relating to goodwill deducted for tax purposes. Against this background, Entity H effects an internal reorganisation in which:

Entity H set up a new wholly-owned subsidiary (Subsidiary A);

Entity H transfers Business C, including the related (accounting) goodwill to Subsidiary A; however,

for tax purposes, the (tax) goodwill is retained by Entity H and not transferred to Subsidiary A.

The submitter asked how Entity H should calculate deferred tax on this internal reorganisation transaction in its consolidated financial statements in accordance with IAS 12 Income Taxes.

At its January 2014 meeting, the Interpretations Committee noted that when entities in the same consolidated group file separate tax returns, separate temporary differences will arise in those entities with paragraph 11 of IAS 12. Consequently, the Interpretations Committee noted that when an entity prepares its consolidated financial statements, deferred tax balances would be determined separately for those temporary differences, using the applicable tax rates for each entity’s tax jurisdiction.

The Interpretations Committee also noted that when calculating the deferred tax amount for the consolidated financial statements:

the amount used as the carrying amount by the ‘receiving’ entity (in this case, Subsidiary A that receives the (accounting) goodwill) for an asset or a liability is the amount recognised in the consolidated financial statements; and

the assessment of whether an asset or a liability is being recognised for the first time for the purpose of applying the initial recognition exception described in paragraphs 15 and 24 of IAS 12 is made from the perspective of the consolidated financial statements.

The Interpretations Committee also noted that transferring the goodwill to Subsidiary A would not meet the initial recognition exception described in paragraph 15 and 24 of IAS 12. Consequently, it noted that deferred tax would be recognised for any temporary differences arising in each separate entity by using the applicable tax rates for each entity’s tax jurisdiction (subject to meeting the recoverability criteria for recognising deferred tax assets described in IAS 12).

At its May 2014 meeting, the Interpretations Committee considered that, in the light of its analysis, the existing IFRS requirements and guidance were sufficient and therefore, an Interpretation was not necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.